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David MacKenzie is a Hong Kong-based product manager at Schroder Investment Management. He is responsible for all aspects of the investment direction and rationale for Asian equities ex-Japan, including reviewing the risk level of portfolios and conducting consultant and client reviews.
What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?
MacKenzie: We are still cautiously positioned in our regional portfolios but are looking at gaining greater exposure to technology stocks in the coming 12 months. We still like the consumer sector, in particular consumer staples which should prove quite resilient in times of uncertainty.
How different or similar is your 12-month investment outlook now compared to the start of this year?
Not significantly different. We were cautious then, and we remain so now. However, given our bottom-up fundamental approach, we are seeing more opportunities and are moving the portfolios into names that we once thought too expensive but have now come back to levels which are quite attractive. This may include some technology names in Taiwan or banks in China or property developers in Hong Kong. Despite this, with the continued global uncertainty, as mentioned, we remain cautious.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
We have buying into Chinese banks on stronger valuation and expectations of stronger earnings. We have also reduced our underweight in Taiwan by adding to technology given valuations are near all-time lows but also through telcos in that market which offer strong dividend support. We have also reduced, but remain underweight, in China given valuations have started to look attractive again after the correction. In China, we are positioned in the consumer stocks as well as banks and select infrastructure companies.
What are your favoured markets in Asia?
We still like Hong Kong as it offers strong fundamentals and quality management. We also like Singapore given the longer term policy initiatives by the government and its current valuation level.
What are the markets you are going to steer clear of in the coming year?
We are negative on India given the current macro-economic situation. The economy is highly dependant on oil imports. The sharp rise in inflation has resulted in monetary tightening. Loan growth has subsequently slowed down. While longer term trends such as rising urbanisation and middle income remain intact, the market is facing strong headwinds from twin deficits and there is a risk of further capital outflows.
What are your market weightings within an Asia ex-Japan equities portfolio?
Our relative weights are:
Hong Kong: +1.30%
Sri Lanka: 0
Which sectors do you expect to outperform in the coming year?
China banks (strong earnings, benefit from RMB appreciation), Singapore property (attractively valued), Hong Kong property investors (low supply should support high rents, quality companies trading at an attractive discount to NAV), consumer staples (defensive stocks which should perform well in times of uncertainty), telcos (strong dividend support and quality earnings profile).
Which sectors do you expect to underperform?
Exporters and manufactures given their exposure to slowing global growth. However, we may see tech start to perform better into the fourth quarter as the global outlook starts to improve into 2009.
What are the main challenges that you expect to face in the coming 12 months?
The performance of the Asian stock markets in the past 12 months has shown that it is still highly correlated with the US stock market despite the Asian economies themselves remaining relatively resilient. With mounting inflationary pressure and slower global demand, Asian equities are likely to face strong headwinds in the near future.
Inflation has surprised on the upside, underpinned by higher energy and food prices. Food and energy together account for as much as 50% of the CPI baskets for many Asian economies. The higher prices for these goods will adversely affect consumption, especially for the smaller Asean markets. It is likely that we see higher inflation in the second half of 2008, as it has spread from food and energy to wages, raw materials and service segments. Monetary policy has started to tighten in a number of the Asian economies. Rising commodity prices, inflation and a slower top-line growth are likely to squeeze corporate margins.
While we are expecting slower GDP growth into the second half of 2008 and for 2009, as well as earnings downgrades, we remain positive on the long term outlook of the Asian economies. We do not expect to see another Asian crisis or any systemic risk this time round. Government, corporate and household balance sheets are all relatively strong. We donÆt have deleveraging problems that are faced by the developed markets. Apart from Korea (where loan/deposit ratios are greater than100%), the Asian financial systems are generally in good shape, with relatively low loan/deposit ratios. We remain confident that domestic consumption will be a long term driver for the region with continued urbanisation and a growing middle class, but the near term demand could be dampened by the inflationary outlook.
The funds are defensively positioned, overweighting consumer staples, telecommunication, property in Hong Kong and Singapore and financials in Hong Kong. We remain cautious about the cyclical stocks on slower global demand while the commodity stocks appear to be a very crowded trade. Any correction of the commodity prices will be positive for Asian equities, as it will ease the inflationary pressure, the strain on governmentsÆ finances from increasing subsidies and help alleviate some of the manufacturersÆ cost pressures.
With the recent stock market correction, valuations have approached mid-cycle levels. If we exclude India and China, valuations of the other Asian markets have started to look more interesting. We believe a further sell down of the Asian markets into the summer will provide some good buying opportunities for longer term investors.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The main risk remains inflation and local government's policy towards handling this pressure. We are underweight the economies which we expect to have the most problem dealing with these pressures, namely India and China.
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